Sources of Health Insurance and Characteristics of the Uninsured, Analysis of the March 1991 Current Population Survey

Since 1965, prescription drugs have
declined as a proportion of total health spending and
currently represent less than 5 percent of national
health expenditures. Although total expenditures for
prescription drugs have increased more slowly than those
for other medical services, the prices of these drugs
have risen at a greater rate: 10 percent between 1989 and
1990.

The majority of prescription drug
expenditures (72.4 percent) are paid out of pocket.
However, third parties are increasing their share of
prescription drug outlays and have experienced higher
than average growth in their prescription drug
expenditures, which rose from 21.9 percent in 1980 to 28
percent in 1989.

The distribution of prescription
drug expenditures is an important policy concern. Whereas
third parties pay for most other acute medical care
needs, consumers pay most prescription drug costs
directly. Individuals have reason to focus on drugs. More
than 60 percent of all physician office visits recorded
in a recent survey resulted in a recommendation for drug
use. The price of some "high-tech" drugs can
readily produce "sticker shock."

When employers provide health
insurance coverage, the plans for full-time workers
almost always cover prescription drugs. This benefit
accounts for about 10 percent of plan costs for active
employees and as much as 40 percent for plans covering
Medicare eligible retirees.

Most employers cover prescription
drugs under the same insurance plan that covers other
medical expenses, although some cover these drugs through
a separate carrier that administers insurance for
prescription drugs and pays the claims. To contain costs,
employees may be encouraged to obtain prescription drugs
through mail order pharmacies or purchase generic drugs.

Lacking technical skills or
knowledge of pharmacology, typical consumers may have
difficulty assessing a drug's value and to a large degree
rely on physicians to choose a product. The prescription
drug industry consists of many competing pharmaceutical
manufacturers, the largest of which has about 9.3 percent
of the U.S. prescription drug market.

Public policy activity is focusing
on government regulation of prescription prices, an issue
that is likely to generate continued interest as
policymakers look for ways to reduce health care costs.
Pharmaceutical manufacturers perceive their markets as
risky and set prices to obtain returns that they consider
commensurate with their risks.